What is a business cycle and why is it used

A concern rhythm is the repeating and fluctuating degrees of economic activity that an economic system experiences over a long period of clip. There are five phases in a concern rhythm. The five phases are growing ( enlargement ) , peak, recession ( contraction ) , trough and recovery. A recession is a point in the concern rhythm where there is a general lag in the economic activity over a period of clip.

A recession can be confirmed if the GDP ( Gross Domestic Product ) growing is negative for a period of two or more back-to-back quarters. The GDP is the market value of all concluding goods and services produced within a state in a given period of clip. The GDP ( Y ) consists of Consumption ( C ) , Investment ( I ) , Government Purchases ( G ) and Net Exports. The GDP can be represented with the undermentioned expression.

Y = C+I+G+NX

A autumn in any of the undermentioned constituents could take to a recession. The major cause of recession is the autumn in the aggregative demand for goods and services. Although the lessening in the aggregative supply of goods of services causes recession, it is known every bit stagflation as rising prices, recession and high unemployment takes topographic point at the same clip.

The aggregative demand curve in this graph is represented by the four constituents of the GDP. A lessening in any of the four constituents of the GDP will do the aggregative demand curve to switch from AD1 to AD2 doing a recession if conditions persists for two quarters. The aggregative demand curve is downward spilling because of three chief grounds which are the wealth consequence, involvement rate consequence and the exchange rate consequence. The wealth consequence states that the lessening in monetary value degree makes consumers experience more affluent therefore promoting them to pass more at lower monetary value degrees. The involvement rate consequence on the other manus provinces that involvements rates are lower when monetary value degrees are low and therefore it encourages consumers to pass on investing goods. Last, the exchange-rate consequence relates the falling of monetary value degree with the autumn in involvement rates. This causes the exchange rate to deprecate and it in bend stimulates the net exports of the state.

The aggregative supply curve in this graph will switch if there is a rise in labour, capital, natural resources, engineering, or expected monetary value degree. The rise in the aggregative supply will do to swerve to switch from AS to AS1. This causes non merely the existent national income to fall doing recession but besides doing unemployment and rising prices rate to increase. The aggregate-supply curve inclines upwards in the short-run while it is perpendicular in the long tally. The aggregate-supply curve in the short tally inclines upwards because of three chief theories which are the misperceptions theory, sticky-wage theory and the sticky-price theory. The misperceptions theory explains how the addition in overall monetary value degree temporarily can misdirect the providers into increasing their end products when the monetary value degree additions to derive more net income. Meanwhile, the sticky-wage theory provinces that the rewards paid to the employees are slow to set to the autumn in monetary value degrees. This causes houses to cut down their production degree as it is less profitable to bring forth goods or services at lower monetary value degrees. Last, The sticky-price theory relates the unexpected autumn in monetary value degrees with the higher-than-desired monetary values of goods sold by houses. Firms has to cut down the measure of goods and services they produce to forestall a excess in the market. In the long tally, the aggregative supply curve is perpendicular as monetary value degrees those non impact the five variables mentioned above.

Following the recession which hit the US in 2007, many states were pulled along as trades and stock markets fell. Malaysia, Cambodia and UK were among the many states who suffered recession as a consequence of the recession in US. The chief ground which contributed to the recession that hit the US was because of the prostration of the lodging bubble. Before the collapsing of the lodging bubble, in 1997 to 2006, the monetary values of houses continued to lift. This attracted people all around the universe to get down puting in lodging belongingss. Peoples started to take up loans to buy lodging belongingss. The monetary values of houses raised by 124 % within that period of clip. However, when the involvement rates of loans increased, the monetary values of lodging belongingss began to drop. It besides became hard for people to pay off their debts. This created a immense sum of exposed debt. Therefore, doing a recession as the US suffered negative growing in GDP for more than two back-to-back quarters.

The above shows the rise of the GDP from 1995 to 2005 before its took a dive down in 2006.

The above diagram shows the crisp autumn in lodging monetary values from twelvemonth 2006 to 2009.

Last, this diagram shows the autumn of US GDP after twelvemonth 2006 due to the autumn in lodging monetary values and the unresolved debts.